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22 October 2015

Leader: China and the new mercantilism

Britain’s openness to world markets has direct social and economic costs, as the crisis in Britain's steel industry shows.

By New Statesman

The Chinese president, Xi Jinping, was welcomed lavishly and deferentially to London this week for a state visit supposedly heralding a “golden decade” of Sino-British relations. Britain has one of the most open economies in the world and, as ardent globalisers, David Cameron and George Osborne are eager to encourage Chinese investment in grand projects such as the building of a new nuclear power plant at Hinkley Point in Somerset. Not all of the Prime Minister’s ideological allies are happy, however. Steve Hilton, the former Downing Street policy guru, scathingly denounced “our obsession with economic subservience towards China”.

There are reasons to be concerned about the development. In absolute terms, Britain already has the world’s second-highest current account deficit after the United States: it is unusually vulnerable to the whims of foreign investors. It is self-evident, too, that China, the ultimate extractive state, is not greatly concerned with the security of British jobs, nor indeed with the promotion of human rights and democracy.

The crisis in Britain’s steel industry – more than 1,700 jobs have been lost at the Redcar steel plant on Teesside (owned by the Thai company SSI) and further losses are expected in Scunthorpe and at Dalzell and Clydebridge in Scotland – is partly the consequence of cheap Chinese imports flooding the market. It has been suggested that state-owned Chinese companies even dumped excess production on the international markets at a loss.

The Cameron government is indulging in what John Gray, in an essay on page 24, calls a variety of mercantilism, “with government not retreating from the marketplace but actively reshaping it so that it better serves the interests of trade and wealth accumulation. The current push to expand Britain’s economic links with China shows Osborne and Cameron using the power of government to guide the market in a way that would horrify any disciple of Milton Friedman. Strangely, this neo-mercantilism goes with a remarkably sunny attitude towards globalisation. It is hard to envision Margaret Thatcher being happy with the role of Chinese money and expertise in Britain’s strategically sensitive nuclear industry.”

Britain’s openness to world markets has direct social and economic costs; and geopolitical risks, as well as human rights abuses by the Chinese, are being disregarded casually. It is also curious that the Conservatives are so willing to embrace investment from foreign governments in British industries yet staunchly oppose state ownership of essential services and utilities in the United Kingdom.

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Ideology provides an explanation. As the British government is guaranteeing China’s investment, it has to borrow, in effect, from China. But this debt will not become part of the deficit balance sheet. The Chancellor’s target of achieving a fiscal surplus in 2019-20 is unaffected.

There are no easy answers to the challenges that globalisation brings. Australia’s foreign investment review board, which assesses investments over a certain threshold, has been criticised for deterring overseas companies, particularly those from China. But few would argue that protectionism provides an answer.

It would also be wrong to sell off British institutions and companies without paying heed to the dangers of doing so, or enacting safeguards to ensure standards of behaviour among foreign investors as well as security for workers. Foreign investment should be encouraged but not at any cost. 

The left returns in Canada

It is just four years since the Liberal Party of Canada endured the worst election defeat in its history. It finished third behind the left-wing New Democrats, winning only 19 per cent of the vote and 34 seats. Its then leader was the Harvard academic Michael Ignatieff, who became the first leader of the opposition to lose his own constituency since 1878. From this nadir, the Liberals surged in the general election on 19 October, achieving a majority with 184 seats and winning 39.5 per cent of the vote. The victory ended nearly a decade of Conservative rule under Stephen Harper.

The new prime minister, the 43-year-old Justin Trudeau (whose father, Pierre, served twice in that role), ran an optimistic campaign that eschewed the divisive tactics adopted by the Conservatives. He pledged to double infrastructure investment (running a modest deficit for three years), raise taxes on the top 1 per cent and reduce them for middle-income
earners, agree to new climate-change targets, legalise marijuana and launch a public inquiry into missing and murdered indigenous women (as Mr Harper had refused to do).

For defeated centre-left parties, including our Labour Party, the Liberals’ triumph is a reminder of how quickly the pendulum can swing – if they make the right choices. 

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This article appears in the 21 Oct 2015 issue of the New Statesman, The 18th-century Prime Minister